What Is Hard Money Loan? Flexible Financing for Real Estate Transitions

For informational purposes only; A&D Mortgage, LLC does not currently offer this product.

As the real estate market continues to ebb and flow with the tides of the economy, buyers and sellers are often looking for innovative financial solutions to bridge the gap between the sale of one property and the purchase of another. In this high-stakes scenario, hard money loan is a flexible and speedy lifeline. But what exactly are hard money loans, and how can they serve as the critical link in your real estate chain?

This article was originally posted on December 27, 2023. 

What Is Hard Money Loan?

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Hard money loan provides short-term financing, secured by the asset’s value instead of relying on the borrower’s credit history. This financing option offers greater flexibility and accessibility for borrowers seeking capital. Unlike traditional loans from banks, which can be mired in red tape and lengthy approval processes, hard money loans are known for their speed and flexibility. This makes them an ideal solution for investors who need to act quickly.

Key Features of Hard Money Loans

1. Higher Loan Amounts. Whether you’re an investor eyeing a high-value property or a homeowner looking to purchase your dream home, hard money loans can provide more financing. This cap accommodates a wide range of real estate deals, from the modest to the grandiose.
2. 5-Year Interest-Only Options. Hard money loans often come with the option for interest-only payments. This means that for a period, typically up to 5 years, the borrower pays only the interest on the loan. This feature can be particularly beneficial for those who are awaiting the sale of their current property or the stabilization of their investment property before refinancing with a traditional mortgage.
3. LLC-Friendly Loans. One of the attractive features of hard money loans is the ability to close in the name of a Limited Liability Company (LLC). This provides a layer of protection and flexibility for the borrower. Real estate investors favor this option because it separates personal assets from business transactions, limiting personal liability and potentially offering tax benefits.
4. Versatility for Various Property Types. Hard money loans shine in their versatility to cover different types of properties that might not qualify for traditional financing. These loans can be used for investment properties, whether residential vacant land or tenant-occupied dwellings. This opens doors for investors to capitalize on diverse real estate opportunities that they might otherwise have to forgo.

The Ideal Candidate for a Hard Money Loan

Hard money loans are not a one-size-fits-all solution. They are particularly suited for borrowers who:

• Need to move quickly on a real estate deal.
• Have equity in an existing property but not necessarily a perfect credit score.
• Are looking to purchase, renovate, and quickly flip a property.
• Require a bridge loan while awaiting the sale of a current home.
• Invest in properties that do not meet the criteria for traditional bank loans.

Closing the Deal

The speed of closing a hard money loan is one of its most compelling benefits. Because the loan is asset-based, the due diligence focuses primarily on the property’s value rather than the borrower’s financial history. This streamlined process can allow for closing times that are significantly faster than those of traditional loans — often within days or weeks, not months.

The Pros And Cons Of Hard Money Loans

Hard Money Loan Pros

1. Speed of Approval and Funding:

• Hard money loans are known for their quick approval and funding process. Unlike traditional loans that can take weeks or even months to finalize, hard money loans can often be approved and funded within days. This rapid turnaround is crucial for investors needing to seize immediate opportunities or bridge financial gaps.

2. Flexibility in Requirements:

• Hard money lenders focus on the value of the property rather than the borrower’s credit history. This flexibility makes these loans accessible to a broader range of borrowers, including those with recent credit events.

3. Versatility for Various Property Types:

• Hard money loans can be used for various types of properties, including residential, commercial, new construction, and even unique properties like condotels. This versatility allows investors to capitalize on diverse real estate opportunities.

Hard Money Loan Cons

1. Higher Interest Rates and Fees:

• The cost of hard money loans is significantly higher than conventional mortgages. Borrowers can expect to pay higher interest rates and additional fees, which can lead to substantial expenses over the life of the loan.

2. Shorter Loan Terms:

• Hard money loans typically have shorter terms, usually between one to five years, with balloon payments due at the end. This can create financial pressure if the borrower cannot sell the property or secure alternative financing before the loan term expires.

3. Higher Equity Requirements:

• These loans often require significant equity in the property. This requirement may not be feasible for all borrowers, particularly those without substantial assets.

Alternatives To Hard Money Loans

1. FHA Loans

• For those who qualify, traditional mortgages offer lower interest rates and longer terms, making them a more cost-effective option. FHA loans provide government-backed options with favorable terms for eligible borrowers.

2. DSCR Loans

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• For borrowers looking for no income verification and flexibility with property types, DSCR loan is a strong alternative. They offer a lower minimum FICO requirement, which makes them accessible to a broader range of borrowers, including those who might not meet traditional lending criteria.

3. 12/24 Month Bank Statement Loans

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• Ideal for self-employed individuals or those with non-traditional income streams. While Bank Statement loans require bank statements for income verification, they provide higher loan amounts and CLTV ratios, making them a viable option for those seeking larger financing solutions.

Final Thoughts

Hard money loans offer a robust and nimble financing solution for those in the throes of a real estate transaction. They bridge the gap when time is of the essence and when traditional funding sources might fall short. With bigger loan amounts and the possibility of interest-only payments, hard money loans provide the flexibility and speed required for real estate investment and ownership. For those who find themselves between properties, a hard money loan can be the keystone that supports your next real estate endeavor.

As a mortgage broker, your clients rely on your expertise to find them the best deals. Our Quick Pricer tool can be an invaluable asset in your quest to secure the most advantageous mortgage rates. Be sure to explore our Programs section for additional resources tailored to your needs. If you have specific scenarios in mind, don’t hesitate to request them; we’re here to assist you. And if you want to provide more value to your clients, consider becoming a partner with us. Together, we can empower individuals and families to achieve their dreams of homeownership.

FAQ

What is a hard money loan example?

A hard money loan is typically used in real estate investment. For instance, an investor might use a hard money loan to quickly purchase a property that needs renovation. The loan is secured by the property’s value rather than the borrower’s creditworthiness, allowing the investor to obtain funds quickly, complete the renovations, and then sell the property for a profit or refinance into a traditional mortgage.

What are the risks of a hard money loan?

The primary risks include higher interest rates and fees, shorter loan terms with balloon payments, and the potential for foreclosure if the borrower cannot repay the loan. Additionally, these loans often require significant equity in the property, limiting accessibility for some borrowers.

What are the typical terms for hard money loans?

Hard money loans generally have terms ranging from one to five years. They often feature interest-only payments, with the principal balance due at the end of the term in a balloon payment. Interest rates are higher than conventional loans, reflecting the increased risk to the lender.